How to Avoid Whistleblower Claims Under Dodd-Frank -- Practical Tips for Financial Institutions

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In passing the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress provided significant financial incentives for employees to “blow the whistle” on financial institutions regulated by the Securities and Exchange Commission (“SEC”). Under SEC rules, a whistleblower is rewarded if he or she voluntarily provides original information that leads to a successful enforcement action in federal court or before any agency so long as at least $1 million is recovered. To encourage whistleblowing on corporate noncompliance, SEC rules allow whistleblowers to recover 10 to 30 percent of what the government recovers, with some exceptions.

Financial institutions now face greater exposure to regulatory investigations because the SEC rules make it more diffi cult to resolve concerns early through internal channels before incurring significant costs. As the National Association of Corporate Directors (“NACD”) pointed out in comments to the SEC, the rules encourage employees to bypass their own institution’s compliance department in their eagerness to inform the SEC of suspected foul play. Accordingly, even institutions with well-established internal fraud and compliance reporting procedures should consider more aggressive steps to encourage internal reporting — and perhaps even reward whistleblowers who promptly report concerns to their employer, rather than the SEC.

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